The Apple Watch continues to show incredible promise although much of it is being masked behind an iPhone lens.

Unrealistic expectations positioning Apple Watch as the next iPhone in terms of sales and popularity have now resulted in many people ignoring positive Apple Watch developments.

When analyzing geographic and retail distribution expansion, product and market strategy, and the competitive landscape, it is clear that the Apple Watch is not just being severely underestimated but has quickly become one of the best-selling wearable devices.

Apple Watch Expectations Pendulum

With Apple Watch representing Apple's newest product category since the iPad in 2010 and the first genuine new product developed during the Tim Cook and Jony Ive era at Apple, the product launch received quite a bit of attention. Apple helped build the excitement as the Apple Watch debut in September 2014 was billed as one of the bigger Apple product keynotes in recent history, even beating the iPad's unveiling in 2010. Expectations were set high.

In reality, these expectations were too high. The Apple Watch was being thought of as the next iPhone, a device that would quickly surpass the device we already carried with us all day, every day. Many compared the Apple Watch keynote to the iPhone keynote, looking for the device's three key features. For iPhone, it was a telephone, communication device, and iPod. Apple obliged with most of these requests, as they followed a similar playbook with Apple Watch, labeling the device as a communications and health & fitness device as well as a timepiece. Once again, expectations were likely mispositioned.

If Apple Watch expectations were a pendulum, right before the Apple Watch was launched, the weight on the end of the string was pulled all the way back to "the next iPhone" as expectations were quite high. However, in the weeks following launch, the overall feel towards the product took on a completely different tone. There was increased attention given to posts discussing how the Apple Watch was just a toy and not ready for prime time. One post went as far as being just a GIF of Apple Watch being thrown on top of a bunch of leftover and old chargers in a desk drawer. The word "flop" was being passed around with increased frequency.

Sticking with the pendulum theme, Apple Watch expectations had quickly moved to the completely opposite end of its trajectory, now classified as a flop. Five months have since passed Apple Watch's launch and after looking at sales, usage patterns, and customer satisfaction surveys, it would appear that the Apple Watch is neither the next new iPhone (at least not in the near-term) or a flop. Instead, it is a fun and cool product with much promise and intrigue. The pendulum will eventually come to rest between both extremes.

Apple Watch chart
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Massive Launch for First Generation Product

The Apple Watch launch was unlike recent new Apple product launches. There were no lines outside Apple Stores, carrier stores weren't selling Apple Watch models, and there was much mystery as to how to sell such a personal device with so many different options. Some even wondered if Apple would be able to find a way to sell Apple Watch in the same setting that it used to sell desktops, laptops, tablets, and smartphones. With the launch now in the rear-view mirror, we have a much clearer picture of the issues Apple faced leading up to the first Apple Watch sale.

While all new Apple products suffer from supply issues at launch, Apple Watch supply was much more limited than most realized. Some blamed Angela Ahrendts for a "botched" Apple Watch retail launch while others even looked at Jeff Williams as holding some responsibility for confusion surrounding Apple Watch availability. The WSJ went on to report that faulty taptic engines in some Apple Watches led to Apple not being able to sell a certain percentage of assembled units, leaving the company with not enough stock to have the device available for in-store purchase. What had been billed as the largest Apple product launch in years seemed to miss the mark.

However, when Apple reported earnings at the end of July, a different picture began to appear. Even though Apple Watch revenue and unit sales were not disclosed, one is able to back into a fair estimate of such metrics using an accurate financial earnings model. Apple likely shipped 2.6 million Apple Watches from launch to the end of June. Taking into account that many of these shipments were ordered at or close to launch, we are then able to paint a picture as to what kind of launch the Apple Watch really had.

Apple likely sold around two million Apple Watches at or close to launch. On an absolute basis, this would classify as the biggest product launch in Apple's history despite there being no long lines. In the preceding weeks after launch, Apple Watch supply then improved rather dramatically. Apple just had completed its quietest record-breaking product launch in its history. When comparing the first quarter of Apple Watch unit sales to previous flagship products, the Apple Watch and iPad are closely ranked. The iPad had a few extra weeks of sales in its first quarter on the market, which distorts the numbers a bit. Regardless of timing, Apple sold more Apple Watches than either iPhones and iPods during the first three months on the market.

Apple Product Sales
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Geographic and Retail Point of Sale Expansion

With Apple Watch supply improving dramatically beginning in June, Apple has been expanding Apple Watch distribution at an unprecedented rate.

From both a geographic and retail point of sale perspective, the Apple Watch is now available at many more locations across the world. While this doesn't necessarily suggest that Apple Watch demand has dramatically improved since launch, it does tell us that many more potential consumers are in a position to be introduced to Apple Watch.

From Apple's perspective, the hardest part of selling Apple Watch is getting it in front of customers to try out and purchase. The more options and alternatives at the consumer's fingertips, the better. The Watch can now be bought not only at Apple Stores, but also at select third-party electronics stores in a few countries, including Best Buy in the U.S. A few mobile carriers have begun to sell the device, and we are now seeing the first big box retailers sell Apple Watch.

It would appear the goal is to build out the Watch's retail availability in order to have a successful holiday shopping season beginning in November. The following two exhibits highlight the expanded geographic expansion for Apple Watch as well as the additional retail locations in the U.S.

Apple Watch Availability - Countries
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Apple Watch Availability - US
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Product Strategy & Marketing

There have been some subtle changes in the way Apple has been marketing and selling Apple Watch. One way of quantifying some of this difference is to look at changes seen with Apple's Watch mini site. While Apple is still relying on a few major use cases for why someone may want to buy an Apple Watch, there is much more attention given on some of the intangibles attached to the device. Watch bands and different watch cases are now emphasized as a way to demonstrate not only how the device is making technology more personal, but also how there is the ability to personalize the watch's appearance in many more ways than there was even at launch.

Apple's Apple Watch page - April 24, 2015 (Watch launch):

Apple Watch Screenshot
Apple

Apple Watch Screenshot
Apple

Apple Watch Screenshot
Apple

It is telling that after only a few months on the market, Apple released a plethora of new Apple Watch Sport Band options, along with Gold and Rose Gold Sport Watch case colors. Having used Apple Watch since launch, I am confident in describing the band as both the Apple Watch's most important aspect and most intriguing element going forward.

Apple Watch bands hold the potential of easily turning one Apple Watch into a number of different watches. While the technology and components found in one Apple Watch case may not change, buying a new watch band could lead to the feeling of owning a completely new watch. This is an intriguing aspect to the device considering how the watch bands do not contain any technology. Surveys indicate around 30-40% of Apple Watch buyers will likely buy more than one band, demonstrating some of the financial and marketing appeal of highlighting various bands available for sale.

When thinking about the future direction for some of the Apple Watch's design and features, it is likely that we will see much more change with watch bands compared to watch cases. Considering that some Apple Watch owners will have multiple watch bands, with some costing hundreds of dollars, it is not likely that Apple will frequently change the Watch case in such a way as to no longer work with previous watch bands. This may suggest that we will see more innovation found with the Apple Watch bands themselves, including options that contain sensors and technological components within the bands themselves. In the long run, it is not crazy to envision certain types of bands being sold where the entire band is one, long flexible display able to show certain notifications or alerts to the user.

Competitors

Despite much attention being put on the current watch industry as being the source of a true Apple Watch competitor, early indication would position Fitbit as Apple's most significant rival in the wearable market. Not only does Fitbit have a much better retail distribution than most watchmakers, including even Apple Watch (for now), but the combination of low prices and customer awareness gives Fitbit some advantages over Apple in the beginning.

While Apple Watch and Fitbit wearables are not exactly direct competitors when looking at prices and feature sets, there is evidence that many consumers consider them to be rivals. I would go even further to say that many look at Apple Watch and Fitbit as the two primary pioneers in the wearable space, even though there were others before them. The following chart highlights Fitbit's annual unit sales, including 11 million units shipped in 2014. The company already shipped eight million devices in the first six months of 2015. The upcoming U.S. holiday quarter will be crucial for Fitbit.

Fitbit Sales Chart
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There continues to be many questions as to the long-lasting effect wearables will have on health and fitness. Early indication would show that there is an element of interest in health and fitness wearables beginning to wear off after a certain time leading to customers discarding or no longer wearing the device. It is likely that fitness will remain a niche use case while there continues to be potential for health to be positioned as a long-term use case for a wearable device. There is evidence that future Apple Watch models will improve on the device's health applications.

Apple Watch Sales Estimates

Expanded Apple Watch distribution bodes well for improving Apple Watch sales momentum as more consumers are exposed to the device, not to mention that Apple is building the Apple Watch retail channel. While it may not be reasonable to expect continuously improving Apple Watch sales on a month-to-month basis, the upcoming holiday season (beginning in November for many countries and including February for China) will be crucial when expecting improving Apple Watch sales numbers. The following are my Apple Watch unit sales estimates for the next four quarters.

3Q15: 3M units (reported)

4Q15: 3M units (increased retail distribution)

1Q16: 5M units (holiday quarter)

2Q16: 3M units (Chinese New Year)

3Q16: 3M units

During the first 12 months on the market, I expect Apple Watch sales to approach 15 million units. When comparing this sales number to the total iPhone installed base, Apple Watch adoption would be approximately three percent. Fifteen million Apple Watch sales in the first 12 months on market would beat iPod and iPhone in terms of initial sales. The following exhibit highlights my trajectory for Apple Watch unit sales in the coming years.

Apple Watch Sales Estimates
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Apple Watch sales trends also demonstrate some of the device's drawbacks. Apple Watch has to be paired with an iPhone. This requirement limits the target market for Watch to current iPhone owners. Even though there are more than 500 million iPhone users in the world, that is a smaller number than the number of people in a position to buy the iPad when it hit the market in 2010. In a rather remarkable sign of iPad's initial sales success, Apple sold 19 million iPads in the first 12 months on the market, which would be 4-5 million more than my Watch sales expectations for the same time period.

Additional Questions

A "cheap" Apple Watch. One question that may take time to answer is how the Apple Watch demand curve looks when plotted against price. Much of Apple Watch's appeal may originate around the fact that it is a premium mass-market luxury object with a starting price of $349. Would a lower-priced collection priced around $200 be a panacea for the product category or would we see something similar to the iPhone 5c phenomenon where the device was never able to shake its "cheap" nomenclature when sold alongside more expensive alternatives?

Apple Watch Demand Chart
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Retail Strategy. It is clear that Apple has been experimenting with the strategy used to sell Apple Watch. After a few months of sales, early trends would suggest that the way people buy Apple Watch Sport at Target will likely be quite a bit different than buying Apple Watch Hermès or Apple Watch Edition. When Best Buy began selling Apple Watch, the company reported much stronger than expected sales. The interesting part is that Best Buy was selling just the Sport collection with only a few stores even having them on display. Most of these sales were done on Best Buy's website. This would suggest that consumers look at the Apple Watch Sport as more like an iPod, iPhone, or iPad, a device that may not necessarily need the personal attention of trying it on.

Meanwhile, someone buying Apple Watch Hermès will likely want a more personal touch during the buying process. Apple's answer to this seems to be to segment Apple Watch collections to certain retail locations. Apple Watch Hermès is available at 70 locations worldwide while Apple Watch Sport is now sold in thousands of retail locations. When it comes to Apple Stores and selling Apple Watch, we will likely continue to see change in the coming years as Apple figures out what works best for selling various models of the same product, each with different intangibles that enter the buying process.

Don't Underestimate Apple Watch

The Apple Watch contains too much promise and potential to question it's long-term viability as a product category. It is becoming clear that the device was dealt a bad hand when it comes to early expectations, being compared too much to its very successful siblings - the iPhone and iPad.

However, when looking at all of the various data points, estimates, and trends, it becomes clear that the Apple Watch is doing much better than it seems. We are living in an iPhone world with Apple expected to sell more than 250 million iPhones over the next 12 months. The iPhone 6s and 6s Plus position the iPhone that much closer to becoming someone's sole computer. In such a world, the Apple Watch likely has a role in handling some of the more simple tasks that were once given to iPhones, in addition to being given an expanding list of use cases that revolve around identity, monitoring, and personality.

In a world moving towards more personal technology, Apple Watch has a place. It's time to stop underestimating Apple Watch.